Problem:
Semi-con is considering a new investment proposal that involves manufacturing and selling a new semiconductor chip. They have identified a operational manufacturing plant that is available for lease, and eleven key sales districts. They have assembled the following information:
- Revenues are expected to be $1,500,000, $1,250,000, and $1,125, 000 in each of the three years of the project's life, all taxable.
- The cost of sales is expected to be 60% of sales revenue.
- Lease payments for the manufacturing plant will be $150,000 per year payable at the end of each year of occupancy.
- A new wafer processing machine will have to be purchased at a cost of $900,000.
- The new machine will be depreciated straight-line down to its salvage value of $450,000 over the three-year life of the project.
- The marginal tax rate of the client is 40%.
- The required return on such investments is 20% p.a.
Should they accept or reject the project? Support your answer with calculations/formulas.